2.5.1 No hawking
Superannuation is not a product to be sold. It is a compulsory product. All employees must have a superannuation account. Too many employees have more than one account. Steps taken to induce persons to hold multiple accounts should be actively discouraged. And persons having existing arrangements should not be induced to change those arrangements unless there is good reason to make the change.
Ideally all employees would make informed and rational choices about their superannuation arrangements. But many employees are not, and will not become, engaged enough to make those decisions. As the Cooper Review said, ‘[t]here are some members who simply want someone else to take care of it all for them’.
As I pointed out in the Introduction to this Report, share hawking has long been prohibited because it too readily allows the fraudulent or the unscrupulous to prey upon the unsuspecting. The root of the problem is that the acquirer is ‘unsuspecting’. That is, the acquirer comes to the unsolicited offer of shares (or, by extension, any complex financial product), unprepared, unable to look critically at what he or she is told, and often not knowing what questions to ask.
Those problems are no less acute in connection with superannuation. The person to whom an unsolicited offer is made will very often not be in a position to judge the merit of what is offered. In particular, that person will seldom if ever be in a position to compare what he or she is offered with what he or she already has under some existing superannuation arrangement.
And that is why the attempts by ANZ and CBA to sell superannuation in bank branches under a ‘general advice’ model (considered in more detail in Volume 2 of this Report) may have contravened the law. In the circumstances in which the offer was made, the customer to whom an offer was made may wrongly have assumed that the seller thought that the product was suitable for the particular customer’s needs, when, in fact, the seller had no basis on which to form any view about suitability. The customer may have taken what was said as personal advice that took account of the customer’s particular needs and circumstances.
As a result, despite some submissions to the contrary, I do not accept that the unsolicited offer of a superannuation product is appropriate or in the interests of consumers.
All forms of unsolicited offering of superannuation arrangements should be prohibited. The prohibition should not prevent trustees or related entities advertising generally the availability of the fund.
The general prohibition now made by section 992A(1) of the Corporations Act (that a person must not offer financial products for issue or sale in the course of, or because of, an unsolicited meeting with another person) and the associated prohibition in section 992A(3) against telephone selling ought to apply to superannuation.
Most superannuation interests are ‘financial products’ for the purposes of the section. However, on its face, the section does not appear to prevent a bank or other entity from offering a superannuation product to a customer where the customer has voluntarily entered a branch, or telephoned the bank or entity, in relation to a matter that is unrelated to superannuation.
The Australian Securities and Investments Commission (ASIC)’s Regulatory Guide 38 says that ‘a meeting or telephone call requested by a consumer is only solicited for any financial products … that are reasonably within the scope of the request’. The Regulatory Guide gives a number of examples, including where a consumer telephones their bank and leaves a message for someone to call them about obtaining a credit card. The Regulatory Guide concludes that if, during the subsequent telephone call, the call centre operator offers to sell or issue a managed investment product to the consumer then ‘[g]enerally, the telephone call would be unsolicited for the offer of the managed investment product.’
I agree that this is how the law should work. But I am not convinced that this interpretation emerges from the words or context of this section of the Act. I therefore recommend that the section be amended to put the matter beyond doubt.
As I said in the Introduction, it should be made plain that a solicited meeting, telephone call, or other contact to discuss one type of financial product may not be used for the unsolicited offering of some other type of product. Put another way, contact with a person during which a superannuation interest is offered will be considered ‘unsolicited’ if the person did not attend the meeting, make the telephone call, or initiate the contact for the purposes of entering into negotiations relating to the offer of a superannuation interest. While common banking products such as transaction accounts and credit card accounts may be considered as one type of product, superannuation products and classes of insurance product are, and should be treated as, distinct product types.
Recommendation 3.4 – No hawking
Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme.
The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that kind of product.
2.5.2 Nominating a default fund
Because some employees, especially those who are young and working part‑time, do not make informed choices about their superannuation arrangements, default arrangements are essential. As the Cooper Review said, ‘MySuper is particularly designed to cater to those members’.
I pause to note that I agree with the Productivity Commission that default superannuation accounts should only be created for new workers, or workers who do not already have a superannuation account. And that default account should then be carried over, or ‘stapled’, to members as they move jobs. The proliferation of unnecessary default accounts is not in the interests of members.
Inevitably, funds compete to be nominated as default funds. If the relevant default fund is not fixed by some industrial instrument, competition between funds will focus on securing nomination of the fund by employers.
The evidence given in the Commission showed that some large funds spend not insignificant amounts to maintain or establish good relationships with those who will be responsible for nominating the default fund for their employees. Money is spent on entertainment and sporting events at which the relevant relationships can be made and enhanced.
Section 68A of the SIS Act provides that a trustee of an RSE, or an associate of a trustee, must not (among other things) supply or offer to supply goods or services to a person ‘on the condition that one or more of the employees of the person will be, or will apply or agree to be, members of the fund’. Current practice by some funds to provide those responsible for nominating default superannuation funds with entertainment or tickets to sporting events may be considered to be the supply of goods or services to a person in connection with one or more of the employees of that person becoming a member of the fund. But it is not a supply on that condition. The fund goes no further than supply with the hope that this may happen and therefore is not in contravention of the Act by doing so.
For this reason, as section 68A now stands, it does not achieve its intended purpose of preventing funds ‘treating’ employers in order to gain members. Its effectiveness is further limited by the fact that the only consequence of a breach is that a person who suffers loss or damage because of the contravention may bring an action against the offender.
What I have called the ‘treating’ of employers should not be permitted. Permitting it means that decisions made by employers about default funds may be affected by considerations that should be irrelevant. It was suggested that such a prohibition would disproportionately disadvantage industry super funds, who, unlike many retail funds, must operate without the benefit of established banking relationships with employers. Even if that were so, I do not accept that trustees should be permitted to attempt to influence employers’ decisions through irrelevant considerations.
I accept that eliminating these particular considerations as irrelevant will not ensure that employers act only on relevant considerations. It must be recognised that their decisions may not be guided only by a proper assessment of what would be in the best interests of their employees. But the manner in which default funds should be fixed goes beyond my Terms of Reference and I do no more than note that there is a more general issue beyond the particular question about the operation of section 68A that is now under consideration.
If, as I consider should be the case, there is to be an effective prohibition against funds ‘treating’ employers, the model for legislation lies in statutory prohibitions against the treating of electors. Legislation of that kind prohibits supply of goods or services where the supply is made with a forbidden purpose or the supply may have the forbidden effect. Section 68A should be amended in that way by prohibiting supply where the supply may reasonably be understood by a recipient to be made with a purpose of having the recipient nominate the fund as a default fund, or having one or more employees of the recipient apply or agree to become members of the fund.
Breach of the prohibition should be a civil penalty provision, enforceable by ASIC. The application of consequences for breach should not depend upon the existence and motivation of persons who have suffered loss.
Of course, if employers were not put in the position of determining an employee’s default fund, the necessity for section 68A would cease. If there are to be changes made to the arrangements for default accounts, that would call for a re-evaluation of section 68A. But such a change is beyond the scope of my inquiry. And in the absence of change, section 68A should be strengthened.
Recommendation 3.5 – One default account
A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account.
Recommendation 3.6 – No treating of employers
Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) where the act may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund.
The provision should be a civil penalty provision enforceable by ASIC.
Cooper Review, Final Report, 10.
United Kingdom, Report of the Company Law Amendment Committee (Cmnd 2657) 1926, 48 .
See, eg, ANZ, Module 5 Policy Submission, 2 ; CFSIL and Avanteos, Module 5 Policy Submission, 14 ; Westpac, Module 5 Policy Submission, 6 .
Section 764A(1)(g) of the Corporations Act provides that ‘a superannuation interest within the meaning of the SIS Act is a “financial product”.’ There is a limited exception for exempt public sector superannuation schemes: see Corporations Act s 765A(1)(q); Corporations Regulations 2001 (Cth) regs 7.1.05 and 7.1.06B.
ASIC, Regulatory Guide 38, 2005, 11 [A3.1].
ASIC, Regulatory Guide 38, 2005, 11 [A3.2(c)(c)].
Cf Australian Consumer Law s 69.
Cooper Review, Final Report, 10.
Productivity Commission, Report 91, Superannuation: Assessing Efficiency and Competitiveness, 21 December 2018, 65.
Industry Super Australia Pty Ltd, Module 5 Policy Submission, 6 .